Though shares of Square (NYSE:SQ) haven't recovered to a 52-week high of $101.15, they've been rising nicely recently. With the stock now trading at $78 -- up 40% year to date but still meaningfully below a 52-week high achieved last September -- should investors buy, sell, or hold shares of the financial technology company?
Here's a close look at Square's recent business execution and a valuation of the stock.
Square's business has been growing by leaps and bounds recently. In the company's first quarter of 2019, revenue surged 43% year over year to $959 million. Adjusted revenue, or total net revenue less transaction-based costs, bitcoin costs, and the effect of revenue adjustments related to purchase accounting, soared 59% year over year to $489 million.
Meanwhile, Square's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared 72% year over year to $62 million. The growth in this metric highlights Square's "ability to balance growth with ongoing investment in our business," management said in Square's first-quarter shareholder letter.
All this momentum comes as Square keeps beefing up its ecosystem of products and services for its sellers. In early 2019, the company launched a new Square online store for merchants, a dedicated mobile app for sellers to invoice customers, and contactless point-of-sale hardware Square Stand and Square Reader for Japan. In addition, strong growth in the company's Cash App, Caviar, Square Capital, and Instant Deposit helped fuel 97% year-over-year growth in the company's subscription and services-based revenue when excluding revenue from recent acquisitions of Weebly and Zesty.
With a host of products and services driving growth for Square, it's no wonder investors have been buying up shares. The company's strong growth is broad-based. In addition, the network effect for sellers continues to improve and switching costs for merchants using Square's services continue to increase as the company keeps providing more value to its users.
But is Square really worth $33 billion?
Valuing Square stock
At $78 per share, Square has a market capitalization of $33 billion. With this market capitalization, Square has a frothy price-to-adjusted earnings ratio of 142 -- more than double financial-tech peer PayPal's (NASDAQ:PYPL) price-to-adjusted earnings ratio of 58.
But Square is growing much faster than PayPal. PayPal's revenue increased just 12% year over year in the first quarter of 2019, much slower than Square's 43% revenue growth over the same time frame. Similarly, PayPal's adjusted earnings per share increased 37% -- slower than 83% growth in Square's adjusted earnings per share over the same time frame.
With such staggering growth and so many catalysts driving Square's business, the financial-technology stock remains a buy, even after a sharp run-up this year. Sure, with the stock trading at such a steep premium, shareholders should expect a bumpy ride. But chances are, five years from now a $78 share price will look like an attractive entry point in hindsight.